Pin bar: how to recognize a liar?

We study the features of identification and trading according to a popular pattern

Markets are like people: they lie from time to time. And just like for a person there are non-verbal signals that make it possible to understand whether he is telling the truth or not, the chart gives a hint if the market is lying. For example, the presence of a long upper shadow at the bar indicates that the “bulls” attack has drowned, and traders should consider selling. It is best if the body of the current bar is within the previous one. There is a well-known model – a pin bar. It got its name from the story of Pinocchio, a European wooden little boy who lied so often that he had a long nose.

Pin-bars belong to simple patterns and periodically appear at any time interval. Proponents of their use believe that ideal models should be sought, including a long shadow and a narrow body. In the case of the “bearish” pin-bar, the entry point to the short position is below the minimum, with the “bullish” – above the maximum. Some difficulties arise with setting a stop order because the shadow is often so long that moving a protective stop beyond it is the same as condemning yourself to a meager profit factor. However, this problem can be solved.

In my opinion, it is necessary to distinguish between the functions of pin bars depending on the time interval. If a pattern appears on a daily or weekly chart, it is an analytical, not a working tool. For its correct use, you should switch to the lower time frame and apply the trading system “ Two screens of graphic models ”. For example, in the case of the “bearish” pin-bar on the daily AUD / USD chart, switching to the hourly time interval reveals an effective reversal formation “ Expanding Wedge ”. The short position can be entered both at the breakout level of support 1-3 and at its retest. A stop order is placed above the maximum of bar No. 4.

The “bullish” pin-bar on the daily AUD / USD chart corresponds to the “Head and Shoulders” model on the lower time frame. As in the previous case, the trader has the opportunity to enter a long position both on the breakthrough of resistance in the neckline and on his retest. As a result, several appear instead of one entry point, which gives time for thought and makes trading more flexible. It makes sense to set targets in both examples based on the readings of the analytical screen. In this situation, the probability of a decent profit factor increases.

If you initially look for pin bars on 60, 30, 15 or 5-minute charts, their functions will radically differ. This is not analytical, but a working pattern. He should give signals about opening positions. The efficiency of working out a pin-bar can be increased if we consider the situation comprehensively: in combination with other models. In particular, on the hourly chart USD / JPY, a bar with a long lower shadow is a component of a more complex graphics configuration – the Wolfe Wave pattern. It occurs in the suite zone near point 5, which is a strong argument in favor of opening a long position.

Simple models give the trader the opportunity to combine them not only within the framework of the price action system but also with other technical analysis tools. They work out rather well at the Fibonacci levels under the conditions of divergence identified by indicators, as well as in combination with a market profile or VSA analysis.